GESB
Lecture 10s.pdf

Fiona gets a 800 benefit from the dog sam bears an

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Fiona gets a $800 benefit from the dog Sam bears an $1000 cost from the barking Efficient outcome: Fiona would not pay any amount above $800 Sam will not accept any amount below $1000 Sam compels Fiona to get rid of the dog. *Note that the private market achieves the efficient outcome regardless of the initial distribution of rights.
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GESB 1006: Economics of Everyday Life University of Macau Active Learning 2: Applying the Coase Theorem Collectively, the 1000 residents of Green Valley value swimming in Blue Lake at $100,000. A nearby factory pollutes the lake water, and would have to pay $50,000 for non-polluting equipment. A. Describe a Coase-like private solution. B. Can you think of any reasons why this solution might not work in the real world?
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GESB 1006: Economics of Everyday Life University of Macau Active Learning 2: Applying the Coase Theorem Collectively, the 1000 residents of Green Valley value swimming in Blue Lake at $100,000. A nearby factory pollutes the lake water, and would have to pay $50,000 for non-polluting equipment. A. Describe a Coase-like private solution. B. Can you think of any reasons why this solution might not work in the real world?
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GESB 1006: Economics of Everyday Life University of Macau Private Solutions to Externalities Why Private Solutions Do NOT Always Work? 1. High transaction costs Costs that parties incur in the process of agreeing to and following through on a bargain Example: Consider the example in Active Learning 2. Suppose lawyers charge $60,000 to represent the two parties and draw up a contract that is enforceable in a court. Then it will be impossible for both parties to come to a mutually beneficial agreement, and the factory will continue polluting the lake.
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GESB 1006: Economics of Everyday Life University of Macau Private Solutions to Externalities Why Private Solutions Do NOT Always Work? 2. Stubbornness Bargaining simply breaks down Example: Consider the example in Active Learning 2. Suppose the town offers $55,000 to the factory. The factory would be better off taking this offer than nothing at all, but the factory may counter with a $95,000 price. Both parties hold out in hopes that the other will cede, but neither does.
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GESB 1006: Economics of Everyday Life University of Macau Private Solutions to Externalities Why Private Solutions Do NOT Always Work? 3. Coordination problems Large number of interested parties Coordinating everyone is costly Example: Consider the example in Active Learning 2. Getting all 1000 residents to agree to a specific offer will be difficult. Moreover, each resident has an incentive to free-ride off his neighbors.
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  • Fall '18
  • Market failure, Externality, University of Macau, Economics of Everyday Life

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